Net neutrality: Doing the Numbers

For Forbes this morning, I reflect on the publication late last week of the FCC’s “Open Internet” or net neutrality rules and their impact on spectrum auctions past and future. Hint: not good.

An important study last year by Prof. Faulhaber and Prof. Farber, former chief economist and chief technologist, respectively, for the FCC, found that the last-minute imposition of net neutrality limits on the 700 MHz “C” block in the FCC’s 2008 auction reduced the winning bid by 60%–a few billion dollars for the Treasury.

Yet the FCC maintained in the December Report and Order approving similar rules for all broadband providers that the cost impact of these “prophylactic” rules would be minimal, because, after all, they simply endorse practices most providers already follow. (And the need for the new rules, then, came from where?)

In response to oral and written questions directed at the agency by Congress over the course of the last ten months (while the White House mysteriously held up publication of the new rules), the agency maintained with a straight face that a detailed cost-benefit analysis of the new rules was part of the rulemaking. But the Chairman seems unable to identify a single paragraph in the majority’s 200-page report where that analysis can be found.

Well, but perhaps bidders in the 2008 auction misjudged the potential negative impact of the new rules on their ability to best utilize the C block. Perhaps a 60% reduction in bid price was an overreaction to the neutrality limits. Perhaps, but not likely. Already, Verizon, which won the auction and is using the spectrum for its state-of-the-art 4G LTE service, has been hit with a truly frivolous complaint from Free Press regarding Google’s refusal to allow software that tethers Android phones to other devices to share the network connection.

And there were rumblings earlier this year in WIRED that curated app stores would also violate the “no blocking” provision in the C block auction (provisions, recall, that were added at the request of Google as a condition of their participating in the auction). If that were true, then Verizon could never offer an iPhone on the LTE network. A definite and pointless limit to the value of the C block…for consumers most of all.

These seem like complaints unlikely to go anywhere, but then again who knows? Even prevailing in FCC adjudications takes time, money, and uncertainty. Investors don’t like that. And the new net neutrality rules make complaining even easier, as I noted earlier this year.

So the impact of the net neutrality rules, should they survive Congressional and legal challenges, will be to reduce incentives for broadband carriers to continue investing in their networks. It won’t stop them, obviously. But it will surely slow them down. By how much? Well, as much as 60%, apparently. And given that the major facilities-based carriers spend around $20 billion a year in network investments, even a few percentage points of uncertainty translate into real losses.

Balanced out by which benefits, exactly? Oh right–these are “prophylactic” rules. So the benefits aren’t knowable. Until the future. Maybe.

If reduced investment wasn’t a bad enough result, there’s a deeper and more deeply disturbing lesson of last year’s Net Neutrality free-for-all. The FCC, an “expert agency,” has become increasingly political. Its experts are being run over by operative inside and outside the agency with an agenda that lives outside the agency’s expertise, trumping traditional independent values of costs and benefits, and of applying scarce resources to their best and highest use.

That may be one reason Congress has yet to move forward with pending legislation granting the agency authority to conduct Voluntary Incentive Auctions, and why the draft legislation tries to curb the flexibility the agency has if it does get the new authority.

Flexibility, after all, cost the taxpayers a small fortune in the 2008 auction. And it led to conditions being placed on the license that aren’t helping anyone, and which may keep consumers from getting what all but a few loudmouths genuinely value.

A rulemaking whose goal was to “preserve” the Open Internet may wind up having the opposite result. The joke, unfortunately, is on mobile users.

Larry, your anecdotes in the Forbes piece about Network Neutrality not working in the real world are rife with what seem to be intentionally erroneous claims.

The iPhone not being available on C-Block because Apple curates the apps, for example… if the network provider isn’t the one preventing functionality, then it’s not a Net Neutrality issue. Similarly, the anecdote about Google “preventing tethering applications”… Google doesn’t prevent anything of the sort. Verizon is the one preventing direct marketing of such apps via the Google App Market, but neither entity actually blocks use of such applications on the platform; tethering applications are easily loaded through direct download from the web.

Even more interesting are your informationally-thin references to the different blocks of wireless spectrum that were auctioned, with direct comparisons on dollar-per-Mhz-pop as though there were no differences in what the “blocks” represented other than the Net Neutrality rules being present on one block. The blocks covered radically different types of spectrum footprint, and wouldn’t be directly value-comparable in any sense that would apply here. The fact that the C-block also included one type of Open Network requirement has far less to do with the price paid for the spectrum than your claims would indicate. At the time of the auction, the complaint from the industry was quite the opposite… they complained that Google’s participation was driving the price up much higher than it would have naturally gone, and yet here you are claiming the opposite because it fits neatly into your narrative.

Come on now… is your intention to mislead people into thinking that Net Neutrality is some weird knee-jerk regulatory bugaboo that is wreaking havoc on the businesses of the poor hapless network providers? It doesn’t hold a great deal of water.